Rules about unit sales and production under the two costing
methods are as follows:

If sales are variable and production constant

a. When production is equal to sales, then absorption
costing and variable costing will give the same amount of net income.

b. When production is
greater than sales, then Net Income under absorption costing will be greater
than net income under variable costing because a portion of the fixed costs was
deferred to other years under the absorption method.

c. When production is
less than sales, then Net Income under absorption costing will be less than net
income under variable costing because a portion of the fixed costs that were
deferred from previous years will be absorbed into this year’s cost of goods
sold.

d. The value of
inventory will be greater under the absorption method because of the deferred
costs; however the total unit count will be the same for each accounting
method.

e. Over the long-term,
net income will be equal under both methods.

If sales are constant and production is variable
then

a. Net income under
variable costing is not influenced by the fluctuations in sales (given a
constant production) because none of the fixed manufacturing costs are
deferred.

b. Net income under
absorption costing is influenced by the fluctuations in sales (given a constant
production) because a portion of the fixed manufacturing costs are deferred and
may be used each year to increase costs.

Calculation of Product and Period Cost of

SQUARE PHARMACEUTICALS LTD.

Calculation of product
and period cost of SQUARE PHARMACEUTICALS LTD.by using both
Absorption Costing and Variable Costing Methods for the 2007 are shown
in the following two tables:

Calculation of Product
Cost under Absorption Costing and Variable Costing:

Particulars

Total (TK.)

Per Unit Cost (TK.)

Production in units

3,076,850,000

Absorption

Costing

Variable

Costing

Direct Material note-1

Variable Manufacturing
Overhead

Fixed Manufacturing
Overhead note-2

Total

3,569,146,000

215,379,500

523,064,500

4,307,590,000

1.16

0.07

0.17

1.40

1.16

0.07

1.23

Calculation of Period
Cost under Absorption Costing and Variable Costing:

Particulars

Total (TK.)

Per Unit Cost (TK.)

Sales in units

3,076,620,000

Absorption

Costing

Variable

Costing

Fixed Manufacturing
Overhead note-2

Variable selling and
distribution expenses

Fixed selling and
distribution expenses

Variable
administrative expenses

Fixed administrative
expenses

Total

523,064,000

399,960,600

615,324,000

92,298,600

307,662,000

1,938,309,200

-----

0.13

0.20

0.03

0.10

0.46

0.17

0.13

0.20

0.03

0.10

0.63

Note-1

Direct material includes
the raw materials, packaging materials, and purchase of finished goods.

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